Employee benefit trusts: Inheritance Tax operation: transfer from one employee benefit trust to another
Under IHTA84/S86(5) where:
- settled property to which S86 applies ceases to be comprised in a settlement, and
- the whole of it becomes comprised in another settlement within the following month, and
- IHTA84/S86 again applies to it when it becomes comprised in the second settlement,
it is to be treated for all Inheritance Tax purposes as if it had remained in the first settlement.
This gives exemption from the tax charges which might otherwise arise on a distribution of property to and its re-settlement by a settlor or participator where the re-settlement is made on another qualifying employee benefit trust (EBT) within a month of receipt. It allows a new EBT to be established without a tax charge when the life of the existing trust (permitted under the rule against perpetuities) expires.
There is no requirement under IHTA84/S86(5) for the first settlement to be brought to an end or for the entirety of the property to become comprised in another settlement.
A simple example would be where £1,000,000 is held on trusts that meet the conditions of IHTA84/S86. The trustees distribute £500,000 to Adam. Adam then has one month to resettle this £500,000 (and it has to be the whole of this £500,000) on a second settlement which also meets the conditions of IHTA84/S86. If he does then the requirements of IHTA84/S86(5) apply to that £500,000 and it is treated as still part of the first settlement for Inheritance Tax purposes. The first settlement still contains the other £500,000 in it and continues to satisfy IHTA84/S86.